Google top line growth in the past 5 years has mainly come from Developed Economies. In the future, Google expects that a big portion of its top line growth would be related to current offerings in Developing Economies (i.e China) and to the Mobile Platform in Developed Countries.

The growth in international revenues in the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006 resulted largely from increased acceptance of Google advertising programs, increases in Google direct sales resources and customer support operations in international markets and Google continued progress in developing localized versions of its products for these international markets.[ii]

Domestic and international revenues as a percentage of consolidated revenues, determined based on the billing addresses of its advertisers, are set forth below:[iii]

Year Ended December 31,

Nine Months Ended

2004

2005

2006

September 30, 2006

September 30, 2007

United States

66

%

61

%

57

%

57

%

53

%

United Kingdom

13

%

14

%

15

%

15

%

16

%

Rest of the world

21

%

25

%

28

%

28

%

31

%

Besides the increase in revenues from international sources, Google U.S. region has been affected by the relative weakening of the U.S. dollar. Nevertheless, it is clear from the online traffic numbers that the future of Google resides outside the U.S. While international revenues in each of the periods presented accounted for less than half of Google total revenues, more than half of its user traffic during these periods came from outside the U.S.[iv]

Another recent trend that could potentially affect Google’s top line and margin is the debate between Cost-per-Action (CPA) vs. Cost-per-Click. Where cost-per-click means someone pays Google (or another entity) each time a user clicks on a particular piece of advertising, cost-per-action means that someone pays when a user completes a potentially larger and more involved transaction[1]. Advertisers will migrate in the future to CPA models, in that scenario Google not only has to guarantee that its ads are well targeted but also guarantee that the user would take action.

Margin Related

When advertising dollars go through the Google Network (user-owned website), Google needs to share the ad revenue with them. For that reason it is more profitable if the ad dollars go through Google-owned websites. Since the beginning of the Google Network in 2002 through the first quarter of 2004, the growth in advertising revenues from its Google Network members’ web sites exceeded that from Google-owned web sites. Beginning in the second quarter of 2004 this changed, growth in advertising revenues from Google-owned web sites exceeded that from Google Network members’ websites. i

INDUSTRY OVERVIEW & COMPETITIVE LANDSCAPE

Google potentially competes with nearly every company in the information technology industry. The problem for companies outside the advertising world is that Google for the most part doesn’t compete for part of the business (i.e. revenues), it competes for what I call ‘purpose’ (maybe purpose that can be later monetize). Google is not planning to charge for some services or products. It seems that it wants to expand its platform and later develop a way of monetizing its reach.

For ‘purpose’, Google has a product that quasi-competes with Microsoft Office (i.e. Docs & Spreadsheets), a product that kind of competes against eBay or Amazon (i.e. Froogle), a product that competes against Mapquest (Google Maps), Snapfish and Kodak Photos (Picasa), Cable providers (Google Video and YouTube), and Free email providers (Gmail). For revenues, Google competes head to head with Yahoo! and Microsoft. These three mega players (Google-$215B in market cap, MSFT-$315B and YHOO-$35B) seemed lock in arm race to obtain part of the advertising budget.

On top of that, Google could also be a future competitor to other media companies (i.e. cable providers, TV channels, newspapers, radio station, etc). Google has been constantly exploring how to expand to other media channels without any proper incursion.So far it has products that provide some related services (Google Video and YouTube) but it doesn’t have a mechanism to exploit in full extent its technology. Google is providing its clients with access to its technology to place ads in different media channels but it is sharing the revenue with those media channels (Google Video, Audio, Print, and TV Ads). In the future, I expect that Google will move to buy or develop technologies that would close this gap. This channel has a similarity with what happens in the Online space and the difference between Adwords and Adsense. I believe Google will give priority to developing its own channels to improve its margins. If Google has done it for Online Searches, I don’t see why it wouldn’t do it for the other media channels.

Google has grown from $86.4 million in revenues in 2001 to $10,605 million in 2006 (expecting $16,598 million in 2007). This grown is explained by the increase of ad revenues due to an increase in effectiveness (Google technology) and an increase in online advertising spending (overall market).

Return on Equity (ROE) has been between the 20-25% range, but return on capital (ROC) has decreased from a high 54% in 2003 to a 17% in 2007 (LTM). This proves how Google moves away from a strategy that focus on bringing ‘business’ to a strategy of bringing ‘purpose’. In other words, Google goal is not only improve its shareholders value but also the world by organizing the information available.

Most of the liquidity and liability ratios do not make sense with Google given its zero debt level.

On the balance sheet side the most important number here is the increase in cash & equivalents for the past years. This allows Google to not have any debt and to have money to acquire new companies (i.e. new technologies).

Margins at an operating level had improved since 2004 because of the focus on Adwords strategy more than an AdSense strategy. Previously in this paper it was explained how these two strategies affect Google margins.

A company comparison (comps analysis) against Microsoft and Yahoo! it’s almost unfair. Google is growing so fast in top line without penalizing its margins that any comparison would leave the other two competitors at the bottom. Stock performance for Google has been a magnificent story (going from $100 at in 2004 to almost $700 today) only comparable to the earlier MSFT days.